Yesterday, the Prime Minister Datuk Seri Najib Razak announced the reactivation of ValueCap with a fund size of RM20 billion, which will be used to invest in selected stocks on Bursa Malaysia.

An injection of RM 20 billion may prop up the market briefly. The Chinese tried this approach with limited success.

Malaysia may find that this is a futile step that will prop up prices of GLCs and UMNO linked companies briefly. However, these steps will not result in lifting the GDP growth rate, enhancing investment, creating jobs, propping up employment or checking inflation.

It is a palliative step with no likely impact on the economic prospects or correcting the economic fundamentals.

Indeed, there may be a backlash effect – artificially propped-up share prices may induce share investors, both local and foreign, to cash in and take the proceeds out of the country, thus adding to the capital flight that is being experienced.

All it does is the Government increasing its stake in companies that it largely already owns

There are other repercussions that appear to be largely ignored.

The RM 20 billion that is to be injected will have to be found from the already stretched Budget which has a deficit.

The deficit will increase; it will have to be funded by increased borrowing; this in turn will lead to the self-imposed debt ceiling of about 55% being breached.

The markets will obviously react negatively to such a development and the rating agencies will downgrade Government debt. The immediate impact will be for interest on Government loans to rise. That will change the fundamentals and worsen matters for the economy.

In brief the steps taken represent ill-conceived panic measures. These desperate actions have ignored the long term harm to the economy and have failed to take account of the side effects.

Najib has few options that are open.

The down-turn in the economy and the rise in prices is largely attributable to global trends e.g. fall in commodity prices, a strong US dollar and the China slow-down.

There is little he can do to counter these developments. The pump priming option does not exist as the debt-ridden economy precludes financing the priming.

These negative external factors have been compounded by domestic events and policy failures. Several factors stand out: the 1MDB scandal, the RM2.6 billion “donation” in Najib’s personal accounts, weak governance, the unwillingness/inability to address the debt issue, focus on feel good actions which do not result in course correction, etc.

Najib has turned his back on much needed reforms as he has pandered to vested interests who have strengthened their hold on him in return for support.

What is clearly needed are drastic measures.

These would include a transparent resolution of the 1MDB issue, the RM2.6 billion “donation” scandal and a restoration of credibility.

It is also important that austerity measures are taken together with some tightening of borrowings by the public sector. Further important measures would need to result in disinvestment (sell-off Government stakes in GLCs) and deregulation.

Some of these measures are likely to be attacked by vested interests and Najib in his weakened state cannot take them on. However it will ultimately be needed.

It must be noted that a continued avoidance of unpopular measures could lead to a deepened crisis and the Government may be forced into accepting externally-forced measures e.g. an IMF program ala the Greek situation. A heavy price for the country.

It would also appear that the present weak Government will need to be strengthened if it is to embark on a program to restore economic stability.

A true national government with a strong technocratic background and a clearly defined reform agenda may be the only recourse if the necessary unpopular measures are to be taken.

Malaysia is heading for a deeper crisis as Najib holds on irrespective of the costs to the economy.